erik lundegaard

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Monday April 18, 2011

Distilling the B.S. of CEOs

I read the following three paragraphs, from the article “Distilling the Wisdom of CEOs” by Adam Bryant, in yesterday's New York Times. Three grafs was as far as I got before I began railing in frustration:

IMAGINE 100 people working at a large company. They’re all middle managers, around 35 years old. They’re all smart. All collegial. All hard-working. They all have positive attitudes. They’re all good communicators.

So what will determine who gets the next promotion, and the one after that? Which of them, when the time comes, will get that corner office?

In other words, what does it take to lead an organization — whether it’s a sports team, a nonprofit, a start-up or a multinational corporation?

The Corner Office by Adam BryantIn other words?

What is Bryant assuming here? He's assuming that the employee who demonstrates the greatest leadership skills will get promoted. He's assuming that promotions are based upon positive skills. He's assuming nothing pejorative—ruthlessness, ass-kissing, bad-mouthing competition—goes into success or promotion in a modern corporate office.

I mean, c'mon.

In distilling that CEO wisdom, Bryant comes up with the following traits that will help those 100 hard-working 35-year-olds (and presumably you and me):

  • passionate curiosity
  • battle-hardened confidence
  • team smarts
  • a simple mind-set
  • fearlessness

All positive, of course. No CEO got where they got because of anything untoward. Maybe we should add “self-promotion” to the list. “Selective memory.” “Bullshit.”

Interesting, too, how these five traits may help the CEO but not necessarily the company. Or us. You'll probably find the last four traits, for example, in every CEO that led us straight into the global financial meltdown. When it comes to investing in derivatives based upon subprime mortage loans, fearfulness has its place.

Posted at 08:05 AM on Apr 18, 2011 in category Business
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Wednesday May 05, 2010

Morons, Crooks, and the People Who Saw It Coming: Assessing Credit on the Subprime Mortgage Disaster

Here are four names to remember. There are more but these are the ones I know:

Michael Burry
Greg Lippmann
Steve Eisman
John Paulson

They're the names to trot out whenever someone—particularly a higher up at an investment bank—says, vis a vis the subprime mortgage disaster, that no one saw it coming.

No, people saw it coming. These guys saw it coming. They bet against it and made hundreds of milions. Or billions.

I certainly didn't see it coming. I'm an idiot when it comes to finance. I'm even more of an idiot when you get into esoteric matters like banks selling mortgages and bundling them into bonds, which are rated by agencies that aren't rating them properly, and some of these bonds, the worst of the bonds, are sometimes rebundled into new packages called collateralized debt obligations, or CDOs, that are also rated by agencies that aren't rating them properly, and then side-bets are placed on those... I mean, you lost me back at the pass. It's partly why I read Michael Lewis. He writes well enough that even I can fathom some of this stuff. Right now I'm reading "The Big Short: Inside the Doomsday Machine," about the subprime mortgage disaster.

Man, is it depressing.

There was an article in The New York Times yesterday, Andew Ross Sorkin's column, about uber-investor Warren Buffett coming to the defense of Goldman Sachs. He said: "I don't have a problem with the Abacus transaction, and I think I understand it better than most." He probably does. I didn't even know it was called the Abacus transaction. All I know is that John Paulson helped put together...what? A bond? Securities? An instrument? Then he shorted that instrument, the Abacus instrument, and Goldman Sachs didn't tell the people who bet long that the instrument was put together in part by the guy who was shorting it; the guy on the other side of their bet.

Buffett says:

“I don’t care if John Paulson is shorting these bonds. I’m going to have no worries that he has superior knowledge. ... It’s our job to assess the credit.”

To which Sorkin chimes in: "The assets are the assets. The math either works or it doesn’t."

All of that makes sense. But it still sounds wrong. It's like finding out that the lineup of the baseball team I'm betting on was put together, not by the manager, whom I trust, but by the guy in the stands who's betting against my team, whom I don't. This behavior may not be illegal but it should be.

There's also the matter of being able to see the line-up. That lineup may not be online. It may not be posted in the dugout. The manager might not exchange it with the other manager's lineup before the game begins. Buffett calls it "assessing the credit," but according to Lewis, the bond market is opaque in a way that the stock market, which is more heavily regulated, is not. It's often hard to assess the credit. Was this particular instrument that John Paulson created for Goldman Sachs one of those that was hard to assess? I don't know. Does Warren Buffett, who understands these things better than most, have greater access to Wall Street firms and can thus assess the credit more easily than, say, a Michael Lewis, or you, or I? I don't know. These are merely my follow-up questions. The follow-up questions that Andrew Ross Sorkin didn't ask.

Let's pull back further. Are roles being blurred here? Why are investors on either end of a deal creating that deal? Why are investment banks placing bets on their own creations? Why is this allowed? Why is this still going on?

Back to Lewis' book. Page 158:

It was in Las Vegas [in Jan. 2007] that [Steve] Eisman and his associates' attitude toward the U.S. bond market hardened into something like its final shape. As Vinny put it, "That was the moment when we said, 'Holy shit, this isn't just credit. This is a fictitious Ponzi scheme.'" In Vegas the question lingering at the back of their minds ceased to be, Do these bond market people know something that we do not? It was replaced by, Do they deserve merely to be fired, or should they be put in jail? Are they delusional, or do they know what they're doing? Danny thought that the vast majority of the people in the industry were blinded by their interests and failed to see the risks they had created. Vinny, always darker, said, "There were morons and crooks, but the crooks were higher up."

That's Eisman and associates in Jan. 2007. They saw it coming. And Michael Burry? He saw it coming in 2003.

You should read Lewis' book. Burry is the most interesting character in it but Eisman is the big quote. I leave with him:

I think Alan Greenspan will go down as the worst chairman of the Federal Reserve in history. That he kept interest rates too low for too long is the least of it. I'm convinced that he knew what was happening in subprime, and he ignored it, because the consumer getting screwed was not his problem. I sort of feel sorry for him because he's a guy who is really smart who was basically wrong about everything.

Posted at 06:47 AM on May 05, 2010 in category Business, Books
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Thursday April 22, 2010

Another Happy Ending

"Really, it was a federal issue. Household [Finance Corporation] was peddling these deceptive mortgages all over the country. Yet the federal government failed to act. Instead, at the end of 2002, Household settled a class action suit out of court and agreed to pay a $484 million fine distributed to twelve states. The following year it sold itself, and its giant portfolio of subprime loans, for $15.5 billion to the British financial conglomerate the HSBC Group.

"Eisman was genuinely shocked. 'It never entered my mind that this could possibly happen,' he said. 'This wasn't just another company—this was the biggest company by far making subprime loans. And it was engaged in just blatant fraud. They should have taken the CEO out and hung him up by his fucking testicles. Instead they sold the company and the CEO made a hundred million dollars. And I thought, Whoa! That one didn't end the way it should have.'"

—from Michael Lewis' "The Big Short: Inside the Doomsday Machine," pg. 18

Posted at 01:20 PM on Apr 22, 2010 in category Business, Books, Quote of the Day
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Sunday November 15, 2009

Not Stars, Selves

So our search for a culprit in the global financial meltdown has taken us from Nick Paumgarten's "The Death of Kings" in the May New Yorker (where many were called but no one chosen), to Michael Lewis' "The Man Who Crashed the World" in the July Vanity Fair (which chose Joe Cassano, head of the financial products group at A.I.G.).

John Cassidy, in a New Yorker piece last month called "Rational Irrationality," suggests a culprit closer to home: You. OK, me. OK, all of us. Not in a "we're all guilty" way but in a "human nature" way. Cassidy suggests that those involved didn't act particularly greedy or irrationally; they acted normally greedy and rationally. They acted the way most of us do. And they will keep doing so. And that's the problem.

He starts with a factual metaphor: the opening of the Millennium Bridge in June 2000, and how, apparently because the bridge's architects hadn't anticipate so much foot traffic, the bridge, with people on it, began to sway a bit; but the more pedestrians adjusted to the swaying the worse the swaying got. Engineers call this phenomenon "synchronous lateral excitation," and Cassidy says, in a non-metaphoric way, it's responsible for our booms and busts. We all do what we all do. Or to quote Catch 22:

Dobbs: Look, Yossarian, suppose, just suppose, everyone thought the same way you do.
Yossarian: Then I'd be a damn fool to think any different.

When the subprime mortgage was going gangbusters, why wouldn't you get involved? When it faltered, why wouldn't you get out? Cassidy writes:

Later there's this:
Whatever the asset class may be—stocks, bonds, real estate, or commodities—the market will seize up if everybody tries to sell at the same time. Financiers were accordingly obliged to keep a close eye on the “mass psychology of the market,” which could change at any moment. Keynes wrote, “It is, so to speak, a game of Snap, of Old Maid, of Musical Chairs—a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops.”
Read the whole thing here. A good follow-up blog post can be found here.
Posted at 07:45 AM on Nov 15, 2009 in category Business
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Friday September 25, 2009

On James Stewart's "Eight Days"

For the second time this year, The New Yorker has given us a must-read article that's only available online by subscription. Haven't read it? You should subscribe. You also might still find it on shelves. Hell, you can borrow my copy. It's from the Sept. 21st issue, and it's called "Eight Days" by James B. Stewart. All about those eight days last September when the world financial system teetered, creaked, raised dust, but didn't...quite...fall. A lot of good inside information. A lot of good reporting. Key sum-up graph for me, about halfway through (italics mine):

The Treasury official described the situation: "Lehman Brothers begat the Reserve collapse, which begat the money-market run, so the money-market funds wouldn't buy commercial paper. The commercial-paper market was on the brink of destruction. At this point, the banking system stops functioning. You're pulling four trillion out of the private sector"—money-market funds—"and giving it to the government in the form of T-bills. That was commercial paper funding GE, Citigroup, FedEx, all the commercial-paper issuers. This was system risk. Suddenly, you have a global bank holiday."

I'd recommend laissez-faire folks in particular read the piece. You still hear them from time to time—maybe more insisently now that last September is a memory and folks have pitchforks out for bankers and brokers. They should've let Bear collapse. They should've let A.I.G. collapse. Let the market be the market. But letting Lehman Bros. collapse was bad enough. If A.I.G. had collapsed, everything would have collapsed. Is this "bailing out Wall Street"? To an extent. Trouble is we're all connected to Wall Street. We're all connected to institutions we don't know about until they fail. Tim Geithner: "It's not Wall Street that suffers when you 'teach people a lesson.'"

We're definitely at an impasse. The momentum my entire life has been toward merging big companies into bigger companies into behemoths that can compete on a global scale. But then you wind up with a company too big to fail. Last September showed why we can't have that. So something's gotta give.

Posted at 09:03 AM on Sep 25, 2009 in category Business
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